Wednesday, 15 May 2013

So Solow argues that the driver of growth is exogenous and that is technological progress and that the government, being endogenous, can do nothing.Well the Soviet system of planning is totally different, the key difference is that they like to plan, specifically investment.Economic planning can be defined as "a component of public policy that controls economic activities", inherent in this you can see the argument for an interventionist state. Klosterman argues that in general terms there are four key social functions of planning:1. To allocate and provide public goods such as street lighting (a good which is non-excludable and non-rivarlrous). 2. To manage social marginal costs i.e. externalities that the market does not take into account. 3. To manage information asymmetries, another form of market failure and;4. To ensure that growth and development is equitable, so practically managing the route of the surplus. The idea is that investment should be planned with a bias towards capital goods and machinery. The idea originates from the Fel'dman model and was used as the Soviet method of growth. This is crucial case study as the Soviet Union was looking to compete with the Western World and their alternative classical method of development.For Fel'dman,Y = aV, a being the proportion of capital investment and V being productivity of capital.The First Five Year Plan, which included strict quotas and soft budgets, was very much an application of the Fel'dman model. They allocated resources in the capital industry so as to ensure a steady stream of consumption. The First Five Year Plan, did not result in the results accepted and so it led to similar ad hoc plans before the Soviet Union declined in the 1970s and dissolved in 1991. How did the Soviet model decide how much to invest, Elleman lays at three methods that economic planner use:1. Utility Maximisation i.e. you maximise utility u(x) by delaying consumptionThe problem with this method is that it deals with what the planners face as opposed to answering the normative question of how much they should invest. 2. Descriptive ApproachThis suggests that moderate figures of investment are derived from negotiations between planners and politicians. This again does not answer the normative question.3. The Growth Maximisation strategy. This was first suggested by Horvat and suggests that investment should happen where the "absorptive capacity of the economy" is met, and by this he means where the marginal productivity is equal to zero. The problem with this is that it directs investment towards wasteful means. When look at the method of how we should investment in the capital sector, then Dobb-Sen provide the answer, they argue for a capital instensive technique to be used as this is the way in which the surplus is going to get maximised.A quick summary of the Dobb-Sen model;In an economy where; the share of investment is sub-optimal and all profit is invested and all wage is consumed, investment should be invested should be invested in capital intensive projects as that is how the surplus can be maximised. In a capital intensive technique, the MP (of labour) = Wage, so surplus is maximised as wage is more accurate.In a labour intensive technique, the MP (of labour) = 0 and so output is maximised as opposed to surplus.Kalecki criticised this saying this capital intensive methods result in a loss of employment and output, in the shot-run, delaying the transition of the economy into a fully developed one.Mao, despite China originally accepting the Soviet model, went on to criticism and differentiate their model of growth as they suggest the best way to grow is on "two legs" i.e. investing in both the light and heavy industry.Furthermore, in developing countries, they often lack the technological capacities to do this and cannot delay consumption as the famine levels are so high. There are three main theories proposed for why the Soviet Union declined:1. The extent of state planning did not forsee technological failure i.e. that there was a lack of competition and efficiency in the production, teamed with the autarkic nature of the model, the producitivity was not efficient and thus failed. Perhaps, this is an evidence for the Solow model?2. The model assumed there was no diminshing returns to capital, this is unlike that what can be perceived in reality. 3. There were errors in investment, e.g. was spending 15-17% of budget on defence sensible?A Contrasting case study....The journey of the Washington Consensus The WC is a neo-classical model which unlike the Soviet style of planning centres on free markets and interest rates. They believed the reason why countries are poor to be a lack of financial capital and consumption and thus trade liberalisation goes some way to deal with this. There are two key defining features of the WC and those are (i) belief in individual freedoms - i.e. the role of state is to regulate exclusionary rights and uphold law and order not intervene otherwise and (ii) the strict manner in which the policies are dictated.However, this is a questionable mode of development as South Korea believed to be an example of WC-led growth did not privatise or immediately open up to trade liberalisation. However, many economist including Buchanan still hold that government failure is by far still greater than market failure. Post-Washington Consensus, this is the New Institutional Economics- Institutions as dictated by North are the "rule of the game" - For a market to operate properly there is a requirement that the right institutions exists e.g. a regime of property rights. Inclusive Growth - This is the notion that growth prescription to focus on strategies which reduce poverty not just the rate of industrialisation.

Monday, 13 May 2013

It is a neo-classical model developed in the 1950s by Nobel Laurette Robert Solow. The model is used to show that although capital and labour have diminishing returns induvidually, together they have constant returns to to scale with GDP. Thus, in the long run growth can only be achieved through exogenous technological progress i.e. the Solow Residual.

Assumptions

1. Labour grows constantly and exogenously at rate n.
2. Capital and llabour have diminshing returns to scale
3. S=I= sY
4. The economy only produces one good, although this can be extended

Model

The Cobb-Douglas model

Y = A Kᵅl ¹⁻ᵅ

A is the total factor productivity, it is exogenous and is determined by the S=I rate.
Labout is also exogenous but it is assumed to be constant too.

If we take b to be any positive real number then:

bY = F(Kb, Lb)

To write in labour form divide by 1/L:

Y/L = F (K/L , L/L)

Y/L = F (K/L)

Y = f(k) (lower case k as when you divde labout you are looking at capital per worker now)

y = Akᵅ , output per worker

The Solow equation gives the growth of the capital-labour ratio, k, and shows that growth of the ratio is dependant on savings , after allowing for the amount of capital required to service depriciation and providing it can provide capital for any new growth in labour.

The further away an economy from its solow equilibrium, the faster it should be growing, this is because these economies tend to have higher capital labour ratios.

The Model depicts the economy tending to long-run equilibrium with capital, labour and output growing at same natural rate.

The (n +d)k rate is the demand for capital adjusted by labour growth and depriciation.

Three main sources of growth.:

1. Disequibrium between sy and (n+d)k

2. Changes in the savings rate, causing shifts in the sy curve, this does not however affect long-run growth rate as does not affect the y=f(k) curve

3. Technical progress, this will affect the longrun steady state equilirbiurm as it will shift the y=f(k) curve

The Solow model shows that both output per worker and capital per worker in an economy will converge to a particular steady state value in the long run and once this steady state value has been achieved, technological process alone can further increase any output.

Policy Implications

According to neoclassical growth theory, output growth results from investment:

1. Increases in the quality and quantity of labour

2. Increase in capital (savings and investment)

3. Technology

Open economies experience income convergence at higher levels as capital flows from rich countries to poor countries

Criticisms

1. Technical progress is exogenous and what developing countries should be looking too, this is problematic when trying to apply the Solow model.

2. Failure to take into account entreprenuership, strength of institutions etc

3. Does not explain why technological progress occurs

4. All inputs are assumed to be independant of one another in the Solow model, this is a limitation because it mean investment and technological progress cannot be linked hence it is difficult to practically test this model.

5. The model says technological progress is the only way for the economy to grow, whereas actually the government is too, as R&D is crucial for technological progress and this requires a government and a patent regulation system,

6. Ignores the demand side of the economy

7. Why care about the long run? We are all dead anyway - Keynes

8. Ronar like many economist argues that growth is actually to be found endogenously, he says long run growth comes through positive externalities from education etc

Wednesday, 1 May 2013

Unfair Terms in Consumer Contracts Regulation 1999 in a nutshell...You might begin by questioning what is the need for this legislation if we already have UCTA? Well the answer lies in that the regulations were an EU directive and thus were not an active choice for the judiciary to make when deciding to incorporate them within the system. So it will become clear that there are quite a number of similarities and overlap with the Unfair Terms in Contracts Act.R3 -> This sets out what it means to be a consumer and a supplier or seller, this is absolutely crucial for utilising the act because the act specifically states that it can only apply to consumer contracts (Reg 4)R8-> This states that should any term in a contract be found unfair then the courts have power to strike it out. So what is an unfair term and how do we define it?We most of the guidance can be found in R5, terms may be found unfair if:- They have not been individually negotiated - Are part of a standard form contract - And that the onus is on the seller to prove they are fair- Sch 2 is mentioned here as it gives a non-exhaustive list of terms that may qualify as unfair but do note the classification of unfairness is not limited to this R6, goes on to provide more guidance on how a term can be assessed:- It shall take into consideration the nature of the contract and circumstances within which it was formed- If the language is plain and intelligible it is important to note that courts will not interfere in pricing issues (as good faith is not assumed within the English Legal System) and the adaquacy of the bargain (OFT v Abbey National, bank charges were not found to be unfair). SCH 2(1)(a) - most important part as it suggests that exemption and limited liability clauses can be found to unfair. CASE POINT:Director General of Fair Trading v First National Bank-> This case is important as Lord Bingham discusses good faith and defines what it means in our legal system, stating that it is good standards of commercial morality and practice, so nuances with the civil law system can be demonstrated here